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‘Co-location’ is taking a mounting toll on tower builds

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The wireless communications industry is beginning to move into a new phase of operation, with cellular phones integral to data transmission as well as voice communication. But that won't necessarily result in a boom for the cellular tower industry or for the companies supplying the raw materials to build them, according to industry analysts.

Looking at midyear statistics from Washington-based CTIA The Wireless Association, you would think demand for cellular towers would be skyrocketing. Wireless subscribers, wireless penetration and total wireless industry revenue (including wireless data revenue) increased substantially in June 2007 compared with June 2005, the non-profit trade association reported. At the same time, annualized incremental capital investments rose 19.2 percent to $23.6 billion, with the number of U.S. cell sites up 18.2 percent to 210,360 sites during the same period.

However, the problem with that interpretation is that there is far more "co-location" activity—several carriers transmitting from the same cellular tower—than the construction of new towers, according to Dave Coleman, equity research analyst for telecom services at RBC Capital Markets in San Francisco.

In fact, while industry investments and the number of cell sites have risen, the actual number of cell towers being built each year in the United States stands at about a fifth the level seen in the late 1990s.

"Actually, very few cellular towers are built in the United States each year," Clayton Moran, senior vice president of Stanford Group, Boca Raton, Fla., said. He put the number at a little more than 2,000 a year on a base of about 115,000 towers operating in this country, which is a much slower pace than had occurred in the late 1990s and earlier this decade, when as many as 10,000 cellular towers were built each year.

Cellular towers are just one type of cell site, Jackie McCarthy, director of government affairs at PCIA The Wireless Infrastructure Association in Arlington, Va., explained. While a significant percentage of cell sites are cellular towers, there are other ways to deploy wireless services to subscribers, including putting antennas on buildings, water tanks and utility poles, as well as in structures like church steeples, she said.

And while cellular towers largely tend to be steel structures, they also contain other materials like copper, aluminum and fiberglass and vary significantly from one to the next, she said, adding that on average the towers range from 100 to 300 feet tall.

There are basically three types of cellular towers, Coleman said. The type that most people think of are usually the lattice towers, which he describes as having a triangular or square base that narrows with its ascent and is supported by a lattice structure. But there are also guyed towers, tall thin structures—sometimes more than 500 feet tall—that are held up by cables; as well as monopole towers, which are essentially a single pole stuck into the ground without any lattice or ground wires.

One question the industry is currently facing is whether there is a migration of voice communication on the backbone of the Internet or if companies will continue to use towers, according to Fritz Ringling, vice president of research at Insight Research Corp., Boonton, N.J. With the tremendous growth of voice over Internet Protocol (VoIP), even with the number of cellular phone subscribers growing there is less need for antennas and for the towers upon which to the antennas are placed, he said. Even with increased usage of cell phones—pegged by CTIA at 1,950 minutes in June 2007 vs. 1,260 minutes in June 2005—from a tower perspective, growth is no more than 1 to 2 percent annually, he estimated.

That could change once the popularity of using a cell phone to access data—whether text messaging, downloading of movies, music, wallpaper, ring tones, etc.—or downright Web surfing increases, "but the mainstay of the industry through at least 2010 will be voice," he said.

That isn't to say that the access of data by cell phones hasn't increased. According to CTIA, annualized wireless data revenue totaled $19.2 billion in June 2007, up substantially from $8.5 billion in June 2005. However, "the use of data on cell phones is just emerging from its infancy. It is only in the past year that it started to have an impact," Moran said.

One thing holding it back is speed, Coleman said, although he noted that is improving. Cell phone networks have gone from 2G (second generation), which is equivalent to dialup speed, to 3G (third generation), which at about 300 kilobytes per second is more comparable to early DSL. "As the technology advances, it will result in faster throughput speed. And when that happens we will see more data applications" and that, in turn, will result in a need for more cellular towers.

Currently there is an average of two to five carriers per tower, Moran said. Once that average creeps up there will be a need to increase tower construction.

It isn't increased materials prices that are holding people back from building towers, although they are clearly on the rise, or fears of an economic downturn. Rather, it's the fact that it's harder to get tower construction approved.

"The Nimby (not in my backyard) attitude has just worsened. The zoning process is very difficult. If you already have a tower in place, zoning is your friend. But if not, it is your enemy," Coleman said, adding that more than 50 percent of the cost of building a tower consists of "soft costs," including going through the zoning process, legal costs and the cost of meeting environmental requirements.

"Our members have been working with the community to locate towers in the best locations and for the design to be sensitive to the community's wants and needs," PCIA's McCarthy said. "They are employing design options to make them more visually pleasing, including 'stealthing' towers to make them blend into the landscape. They could look like pine trees or palm trees or could have a graduated paint scheme."

Another factor that suppressed new tower construction in 2007 was the auction by the Federal Communications Commission of the 1.7- to 2.1-gigahertz spectrum in late 2006. But this should just have a short-term effect and could eventually result in increased tower demand, Coleman said.

Generally, the economic downturn isn't expected to have much negative effect on wireless carriers' capital budgets, industry observers said, unless it is very deep and very extended.

But the North American cellular infrastructure market could experience a decline in the number of "base stations," or towers shipped, or at best sluggish growth during 2008, Matia Grossi, lead infrastructure analyst at IMS Research Group in Austin, Texas, said, adding that more concentration will be placed on software upgrades of the base stations than new towers.

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